Assured Guaranty Ltd. (AGO) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Assured Guaranty Limited Fourth Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Robert Tucker, Head of Investor Relations. Please go ahead.

Thank you, operator, and thank you all for joining Assured Guaranty for our 2015 fourth quarter and yearend financial results conference call, today's presentation is made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. The presentation may contain forward looking statements about our new business and credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, financial results or other items that may affect our future results. These statements are subject to change due to new information or future events. Therefore, you should not place undue reliance on them as we do not undertake any obligation to publicly update or revise them, except as require by law. If your listening to a replay of this call or if you are reading a transcript of this call, please note that our statements made today may have been updated since this call. Please refer to the investor information section of our Web site for our recent presentations, SEC filings, most current financial filings and for the risk factors. In turning to the presentation, our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited; and Rob Bailenson, our Chief Financial Officer. After their remarks, we will open the call to your questions. As the webcast is not enabled for Q&A, please dial into the call if you would like to ask a question. I will now turn the call over to Dominic.

Thank you, Robert, and welcome to everyone joining today's call. During 2015 Assured Guaranty once again achieved outstanding results and made significant progress on our four key business strategies generating current and future revenue through new business production, managing capital efficiently, executing alternative strategies such as acquisitions and commutations and mitigating losses. Specifically in 2015 we earned record operating income of $699 million or $4.69 per share, which are respective increases of 42% and 66% year-over-year. We increased operating shareholders' equity per share and adjusted book value per share to record levels of $43.11 and $61.18, respectively. We achieved an operating return on equity of 11.8%, up from 8.1% in the previous year. We increased the present volume of new business production by 7% over our 2014 PVP. We also completed our acquisition of Radian Asset, which contributed $654 million to our claim paying resources, $193 million to operating shareholders' equity and 570 million to adjusted book value at the time of acquisition, as well as approximately $2.13 per share to 2015 operating income. And we increased our quarterly dividend to $0.12 per share and repurchased 21 million common shares thereby returning to shareholders a total of $627 million of our excess capital equal to 15% of our market capitalization at the start of the year. This week, our Board increased the dividend again to $0.13 and authorized more share repurchases, which Rob will tell you more about. It is also fair to say that 2015 was the year that Assured Guaranty substantially put the effects of the great recession behind us. Our exposure to residential mortgage backed securities in excess of $35 billion at the end of 2008 has amortize or otherwise diminished by 80% to $7 billion, which much of the remaining exposure subject to loss sharing agreements with providers of representations and warranties. We have now completed our direct pursuit of rep and warranty claims, which has further validated our loss mitigation abilities. Since January 2008, we have recovered $3.6 billion, and in total expect to recover $4.2 billion from rep and warranty providers, including future benefits to be received under settlement agreements. The market is increasingly recognizing the proven robustness of our business model and the compelling value of our guaranteed product, which includes not only the certainty of payment provided by our unconditional guarantee of principle and interest when due. But also disciplined credit selection, underwriting and enterprise risk management, long-term surveillance of insured bonds and the ability to protect our capital through remediation and loss mitigation while insulating insured investors from negotiations and litigations associated with workouts and restructurings, enhanced market liquidity based on $500 million of daily trading volume and bonds we insure, the stability of our insured bonds market value compared with the same troubled issuers uninsured bonds. On the issuer side, our proven record of reducing financing costs, improving market access, broadening distribution and saving issuers money. We believe growing awareness of this value proposition is fueling growth in the demand for bond insurance. In US public finance, annual prime rated market par insured was 36% higher in 2015 than in 2014 far outpacing overall municipal new issuance growth of 20% and reaching a penetration rate of 6.7% of all par sold, the highest annual level since 2009. Fourth quarter industry penetration was even higher at 7.3% of par. In our most active market segment, transactions with underlying ratings in the single A category, guarantors insured 54% of the new issue transactions and 22% of the par sold. Insured penetration grew despite even lower interest rates and tighter credit spreads than in the preceding year. The index for 30-year AAA yields averaged approximately 35 basis points below its 2014 average. During the year, credit spreads tightened to levels not seen since 2008. While these conditions constrain pricing, we maintained our discipline and were even able to improve pricing as the year progressed. Clearly, the growth in demand is driven not by the rate environment but by improved perception of our guarantees' fundamental value. If long-term interest rates increase, growth could accelerate significantly. Assured Guaranty led the municipal bond market in both par insured and number of transactions during 2015 capturing 60% of all insured new issue par and 54% of the insured transactions. Our 1,009 primary market transactions represented $15.1 billion in insured par, a 41% increase, and more than $5 billion more than the combined total for the rest of the industry. We were the insurer of choice for bonds issued in amounts of $10 million or less, leading the industry with 662 transactions, totalling $3.4 billion in par insured. Also reflecting improved acceptance of our insurance by institutional investors, we guaranteed 55 transactions sold with insured par of $50 million of more of which 15 exceeded $100 million. Once again, demonstrating the exceptional value of our guarantee, we insured 64 transactions with underlying ratings in the AA category whose aggregate par total, amount total at $1.8 billion. Counting secondary market activity, our total 2015 U.S. public finance par insured reached $16.1 billion. An important strength of Assured Guaranty is our diversified strategy, which allows us to avoid dependency on a single market. In 2015, our international infrastructure and global structured finance businesses each contributed more than $26 million to our PVP, together representing 31% of total PVP. Our internationally restructure business had its best production year since 2008. We have patiently and persistently worked to rebuild the European market for financial guarantees, which was damaged during this global financial crisis, and we are confident that our efforts will continue to pay off. We still have opportunities to replace other monoline guarantors on existing transactions and also to generate new premiums through refinancings and restructurings of some of our current exposures. We are also making progress toward guaranteeing a number of new project financings. In global structured finance 2015, we closed an additional bilateral transaction with a life insurance company as well as a number of other transactions. Additionally, we obtained an A-plus rating from AM Best, the second highest rating in their ratings scale for AGRO, our Bermuda based specialty reinsurance subsidiary. The AM Best rating is particularly relative for the insurance company clients AGRO serves. Our accomplishments in 2015 were achieved against a backdrop of magnified headlines concerning Puerto Rico. Let me put this in perspective. First, as rating agencies have affirmed, even under highly stressed rating agency assumptions, our potential Puerto Rico losses are manageable within our current rating levels. The average annual debt service on all of our Puerto Rico exposures over the next 10 years is roughly equivalent to what our investment portfolio generates in income each year. And no rational person expects 100% losses on each of our 11 different exposures many of which are constitutionally protected or secured. The next thing to realize is that Puerto Rico's downgrades immediately showed the market an important benefit of our insurance. Puerto Rico related bonds we insured have consistently traded better than their uninsured equivalents since the downgrades and often by wide margins. Also I want to emphasize that negative headlines do not trigger losses. We have repeatedly been able to use our capital, liquidity and market access to work through troubled credits with outcomes far superior to what was initially offered, as witnessed by the outcomes in Detroit, Jefferson County and Stockton. In fact, the most recent example is the recovery plan contemplated by the restructuring support agreement with the Puerto Rico electric power Authority. Puerto Rico's legislative assembly and Governor have approved enabling legislation that serves as a foundation for PREPA's recovery plan. And if the remaining conditions are met and the recovery plan is implemented, it results in no losses for Assured Guaranty. And it commits bond insurers to provide very manageable additional financing support for PREPA to set it on the road to modernization, long-term sustainable rates for consumers and continued access to efficient financing. This recovery plan could serve as a model for consensual restructuring of other Puerto Rico credits. Having said that, there is still no excuse for the current behavior of Governor Padilla and other Puerto Rico officials, instead of building on the success of the PREPA agreement as a model solution for other credits, the governor and his administration have been spending their time in Washington D.C. lobbying the U.S. Congress to retroactively change established law to permit Chapter 9 bankruptcy in Puerto Rico for even broader restructuring powers that would give the Commonwealth rights unavailable to the states. That the U.S. Treasury is advocating for this dangerous proposal to break binding legal commitments and constitutional protections will undermined the belief that America keeps its commitments and the rule of law that enabled our nation to become the leading global model for economic success. For Treasury to claim that this would not be a taxpayer bailout is to ignore the harm is would cost to millions of U.S. taxpayers who invested in good faith in Puerto Rico's debt. Congress is being asked to reward fiscal and operational mismanagement and to condone poor disclosure, poor governance and lax tax enforcement, all of which are well documented in Puerto Rico's own disclosures as well as the corrupt cronyism most recently highlighted by the guilty plea of a high ranking campaign finance official of the governor's own political party. This would be a terrible message to send to municipal borrowers, that is the okay to manage incompetently and corruptly and okay to abandon legal commitments when it is politically inconvenient to keep them. The Puerto Rican government is acting with disdain for the rule of law and its own constitution and is violating the U.S. Constitution. For example, purportedly to make payments on certain general obligations debt due at the beginning of January 2016, the governor issued Executive orders for the government to retain or clawback tax and other revenue pledged to secure the payment of certain other bonds. This action caused a payment default and a claim that Assured Guaranty paid on Puerto Rico infrastructure financing Authority revenue bonds, and if allowed to stand, the revenue clawback would eventually force two of our other insured revenue bond issues to default. Assured Guaranty and other bond insurers have brought suit federal court asserting that this attempt to clawback pledged tax revenue is unconstitutional because it impairs the payment priority granted to the revenue bonds, whose proceeds were used to fund essential public services by subordinating their payment to the paying of the Commonwealth's general expenditures. This impairment of contract and taking of collateral violates multiple provisions of the U.S. Constitution. The governor seized on the lawsuits to promote his politically motivated crisis narrative. He claimed the suit was the beginning of the legal chaos he had asserted would ensue unless U.S. Congress promptly met his administration's demand to allow repudiation of its government's contractual and constitutional obligations. Then on January 29, 2016 Puerto Rico unveiled a restructuring proposal to creditors, concocted without any prior consultation with creditors. It appears to be intentionally unworkable because the Commonwealth wants Congress instead to provide restructuring authority to Puerto Rico can use as a negotiating club or for an eventual attempt to cram down creditors. These political maneuvers are delaying the progress of consensual restructuring and structural reform that Puerto Rican desperately needs if it is to regain access to the municipal bond market and rebuild its economy. If Puerto Rico succeeds in getting some form of Chapter 9, it will obviously harm Puerto Rico bondholders, some of whom live on the island who have invested a significant portion of their life savings in supposedly bankruptcy proof debt and have been partners with Puerto Rico for many decades helping the island to build its roads, airports, hospitals, schools and other infrastructure. It will also harm all of the citizen of the Puerto Rico whose government will lose access to efficient financing, incur huge legal costs, drive away private investment and cause long-term economic harm far greater than any possible debt relief. And it will harm people in the states and municipalities across the country whose cost of borrowing will likely rise as investors will be compelled to price in the possibility that state governments will insist on the kind of retroactive special treatment Puerto Rico is demanding, or retroactively change their own laws regarding the use of Chapter 9. Puerto Rico has significant structural, operational and economic problems that will not be solved by bankruptcy. To the extent such problems exist, they are largely of Puerto Rico's own making. Yet instead of doing everything within their power to legally manage their debt, reform their government, better manage their revenue collection and expenses, and rebuild their economy, Puerto Rico officials have deliberately pushed a self fulfilling crisis narrative to influence Washington lawmakers. To embrace the Commonwealth's narrative suggests an irrational belief that harming creditors who are mainly U.S. taxpayers will benefit Puerto Rico when the reality is that it will prevent the long-term solutions and partnerships that are necessary to bolster the island's economy to the benefit of its people. With the government in Puerto Rico is doing everything in his power to unjustly impair creditors, how does it expect anyone to provide further credit to the island to help build its economy. We believe there is a constructive role for the Federal Government that does not involve granting bankruptcy authority, and with regard to Puerto Rico's creditors, only consensual restructuring can assist in the Commonwealth's long-term recovery. We are prepared to work diligently with all stakeholders to achieve solutions that promote economic growth, provide federal control of fiscal management and facilitate efficient, financing through the capital market. These practical and moral priorities are where Puerto Rico should be focused. I am further dismayed at the recent position of certain Puerto Rican officials who have stated that they will reject any U.S. Congressional leverage to create a financial control board. That they are claiming humanitarian crisis that is the result of years of fiscal mismanagement and poor government, how can they still claim any right to self govern their financial operations. The Puerto Rican government cannot have it both ways. Without significant government reform, the situation in Puerto Rico will not improve. Coming back to we create a value, there are two key strategic objectives that can improve future earnings and deploy some of our excess capital. One is acquisitions, like that of Radian. As inactive legacy financial guarantors finalize their own rep and warranty agreements and terminate poorly performing exposures, they may become appropriate acquisition targets. The second is the re-assumption of business we previously ceded to third-party re-insurers which typically involve a commutation premium paid to us that is recognized immediately in earnings. As an example, we reassumed $855 million of net par exposure in 2015. Turning to our loss mitigation and capital management strategies, I've mentioned our trailblazing highly successful RMBS recovery efforts. We also manage risk and improve capital efficiency by terminating transactions that are below investment grade or carry rating agency capital charges disproportionately high for their credit quality. During 2015, we terminated $3.9 billion of net par exposures. Similarly, we purchased bonds we have guaranteed to mitigate losses, reduce capital charges, while improving our investment portfolio returns without taking on additional risk. In 2015, we purchased $945 million of such rep bonds. Through terminations, rep bond purchases, refinancings of scheduled amortizations of insured transactions we reduced our net below investment grade exposure by $3.1 billion in 2015, even after acquiring an additional $3 billion of below investment grade exposure in conjunction with the Radian transaction. Our overall par exposure also declined while claim paying resources increased leading to a 15% reduction in insured leverage. Our 2015 results are proven again that Assured Guaranty's business model works, and our operating strategies are sound. We are looking to the future with great confidence. Our financial position is strong and stable. The value of our financial guarantee product has never been more evident, and we have abundant capital to protect our policyholders, write new business, invest in new opportunities and continue returning excess capital to shareholders. I will now turn the call over to Rob.

Thank you, Dominic, and good morning to everyone on the call. Our full year operating income of $699 million or $4.69 per share was the highest ever recorded by the company. It was fuelled by the Radian acquisition, high levels of refunding and a variety of loss mitigation strategies including the settlement with our last significant provider of reps and warranties. Our fourth quarter 2015 operating income was $117 million or $0.83 per share, compared with operating income of $81 million or $0.50 per share in the fourth quarter of 2014. This represents a 44% increase in operating income or a 66% increase on a per share basis. Our fourth quarter results reflect the fundings that resulted in premium accelerations, the contribution to earnings from the Radian portfolio and the continued success of our loss mitigation efforts. It also includes changes in U.S. public finance loss reserves reflecting recent developments in Puerto Rico. Financial guaranty and credit derivative revenues were $312 million in the fourth quarter of 2015 compared with $178 million in the fourth quarter of 2014. This increase relates primarily to higher accelerations of $180 million from refundings and terminations. Investment income in the fourth quarter of 2015 was higher than the fourth quarter of 2014 by $35 million. The increase was mostly a result of non-returning income generated by loss mitigation securities that were acquired at discounts and subsequently paid off at par. Total economic loss development was $133 million in the fourth quarter of 2015. This was driven mainly by changes in the expected losses on various Puerto Rico exposures and higher estimated delinquencies on HELOC transactions with mortgages that have interest-only reset features. The impact of changes in the risk-free discount rates was a loss of $6 million across all sectors. In February of this year, we completed our previous buyback authorization, and earlier this week, our Board authorized an additional $250 million in share repurchases. Shareholder dividends, share repurchases and recurring debt service and operating expenses at the holding companies are supported by the dividend capacity of our insurance subsidiaries and cash at the holding companies. As of this week, we had $41 million in cash and investments at the Bermuda holding company, and approximately $98 million at the U.S. holding companies. After three years of steady execution of the share repurchase programs, we have repurchased 31% of our outstanding shares for a total of $1.5 billion, its accretive impact on our key financial metrics are clear. Total year 2015 operating income per share was 26.4% higher than it would have been without these repurchases. The corresponding impact on adjusted book value and operating shareholders' equity were increases of 21.5% and 14.6%, respectively. As a result of share repurchases and the execution of our various strategies, including the Radian acquisition, operating shareholders' equity and adjusted book value per share increased to record highs of $43.11 per share and $61.18 per share respectively. I will now turn the call over to the operator to give the instructions for the Q&A period. Thank you.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. And our first question comes from Peter Troisi with Barclays. Please go ahead.

Just a follow-up on the distressed CLO transactions in the quarter that was mentioned in the press release, I believe exposure was at AGC. So is it fair to assume that the notes that you bought are now in the investment portfolio of AGC?

Yes. That's exactly what you should expect. We tore up the CDS and bought the notes and valued them at fair value.

Okay, great. Thanks. I think that second to pay wrap had of notional of about $375 million. Is the right way to think about the par amount of the CLO notes that you bought approximating that level?

There's been some amortization since then, but that's how you should look at it. But remember we also bought them, and then you have to fair value them at the expected level. The difference between that fair value and the par amount of that went through losses incurred in the structured finance line.

Okay, great. And that was in the fourth quarter?

Yes.

And then just one more for me, are there any plans to change the $100 million notional hedge associated with that seal off?

No, not at this time, let me also mention we bought that bond back at a discount. I just want to make it clear.

Our next question comes from Sean Dargan with Macquarie. Please go ahead.

I just wanted to see if we can get an update on your thoughts around asking for an extraordinary dividend. Is it correct that one of your competitors who also has significant Puerto Rico exposure has asked for and received extraordinary dividends from New York?

I don't really -- can't give you what the competitors are doing. I think I know Radian got one. And I'm not sure there's been, or CIFG got one, but I'm not sure the amount of their Puerto Rico exposure. Radian of course had more but of course as you know we purchased Radian. So they are the only two that I know of. But obviously they are very different circumstances than the other companies that stay active in the marketplace.

I guess where I'm going with this is do you need a resolution on Puerto Rico before you feel like you can ask for a special dividend?

I think as I said on the last call, I think the answer for us is no. We'd like to get a lot more clarity on Puerto Rico because I think it just makes the case to the regulator that much easier. And we'd rather have the continued relationships that we have where basically this is a good, strong supported relationship between ourselves and the regulator. We don't want to put the regulator in a position where they have to really wring their hands over this. So we think any further clarity on Puerto Rico helps the argument. However, based on our excess capital position and hopefully with the PREPA deal, by enlarge being complete except for the final approval the rate formula going forward to allow for the continued ability to repay the new bonds, that I think provides a little bit further incentive to us. And as I said our excess capital position would tend to indicate that regardless of which way Puerto Rico goes, we're obviously very, very well capitalized and well-capitalized even under stressful scenarios that allows us to maintain our ratings, which is probably the most critical component that we will look at.

And one other topic that investors have been asking about is, I'm just wondering if included in your public finance economic loss development, there is any development related to Chicago or the State of Illinois?

We continue to look at those exposures. Obviously, you'll have a better handle on where our position is vis-a-vis reserving, if you look at our below investment grade list. Obviously, that's where were starting to trigger off reserve consideration if it's below investment grade. And as of today, Chicago is not below investment grade.

Our next question comes from Geoffrey Dunn with Dowling & Partners. Please go ahead.

Thank you. Rob, I missed one number, the Bermuda holding company cash?

Hold on one second. All right, it's $41 million of holding company cash in Bermuda, and there's $98 million of the holding company cash in the U.S. holding companies.

The other question is on the loss mitigation efforts you're buying the rep bonds. Can you provide some historical detail in terms of the successes there? It gives a pop here and there, obviously a bigger one this quarter. But do you have statistics around the average discount you bought? The average discount you've exited? I know it's been an ongoing effort for another way of generating value here. I'm just curious if you have bigger numbers to put around that just to frame it?

Yes, these might not be up to the penny, but they are going to be reasonably close. I think in total we bought over $2 billion of securities. The average against all of the securities is in the, I think, high 60s, low 70s. Remember, in the early days the RMBS securities that we bought back were deeply discounted, so they were driving numbers down in the 30s and 40s. And in recent years, obviously, been more strategic, and the witness is in the in the last quarter where we bought back those CLO securities at a discount. But these now become very different purchases for us. In this case, we were perfecting a legal position. We were taking advantage of a discount. We've used it in loss mitigation in a different context than say the RMBS. Number two, we've been buying a lot of securities in the last say 18 months where the discount is a lot smaller, and they are really short-term securities that are producing better investment yields than the new money we can invest in the standard portfolio. So the average has been in the totals I think were in the plus 2 billion's. The average has been around 70%. And as I said, we changed in the nature of it. If you notice in the past, we have been buying some of the more larger not necessarily concerned about huge economic loss but taking advantage of either the discount to perfect returns or to provide us a better status in terms of if there is a work out, where we stand in the work out scenario.

Somebody just handed you some [indiscernible].

It says we purchased 3.4 billion with an initial purchase price of approximately 2.2 billion. Second it gives the overall number. We actually tracked what we call the value creation of this thing, and it's been highly, highly profitable for the organization.

Okay. Great.

The other thing, Geoff, the average yield on these lost bid bonds as of the balance sheet data is about almost 12%.

Okay. And then, I'm not sure how to even ask of this last question, but we all see the same things going on with Puerto Rico and what seems to be a lack of good faith and effort on the negotiations. It seems inevitable that this is going to the courts, ultimately. So when you think about something like this its unprecedented, I think, going into the courts. How do we think about the reserving developments over a long period of time of a potential legal battle? Each quarter, do we have to deal with plus and minus is on the probabilities? Or is that something that's just ultimately plays out over a longer time, and we don't see much adjustments like we have been seeing over the last year for Puerto Rico?

I just want to say, based on the rules, Geoff, if that 163 requires us to look at all new information within the quarter. We then look at our profitability weighted scenarios and adjust those probability weighted scenarios based on that new information. If you are reading in the paper that there is some negative development with respect to some credit, it's fair to say is a chance that there's going to be some development on that credit within that quarter. On the same side, if you hear that there is some positive development within a quarter, on a specific credit, they'll be a positive impact to our loss reserving probability weighted scenarios. If there is no new information, with no material change to any information within a quarter, then you would see very little movement. That's how I would describe it.

Okay. Just to wrap up, I'm sorry one more. Have you released any of your PREPA reserves at?

Nice try, Geoff. I appreciate the question. But we obviously don't talk on specific credits. There is too much going on in the marketplace and too much negotiation. And obviously if we are preparing for any sort of a legal confrontation, all of that information has to be kept private. To Rob's point, though, we hopefully as we set reserves, we try to include all possible scenarios and probability weight them, if you think about a standard situation on any of the credits, hopefully we have considered every possible situation that could apply. And maybe it's going to be a matter of just juggling probabilities now as we come to the weighted average outcome. As you said, this could take a long period of time. If they dare step over that B line, you can assume there will be substantial litigation. This is not similar to other credits where, by and large -- although they have done some strange and wonderful anti-bond market things, by and large the overall solution was acceptable into the marketplace. And for those people that were in an impaired position, they chose not to provide further objection to it. In Puerto Rico's case, whatever the wild and wonderful weird activities that are going to take place, you can assume that this is going to be quite the battle. We believe firmly in our contractual protections. We believe firmly in our constitutional priority. In regards to who puts what on the table, we will vigorously defend that.

[Operator Instructions] Our next question comes from Bose George with KBW. Please go ahead.

This is actually Chas Dyson on for Bose. I wanted to follow-up on Sean's question on Chicago. I think one of your competitors has put the public schools on their BIG list. I just wanted to get a little more color on how you are feeling about both the city and the schools and what keeps that off of the BIG list for now?

Presumably for the Chicago and the school district, the way our deals work, there is appropriation that's done at the beginning of the year that basically funds the debt service for the year. The way the appropriation is formed, it's a specific, in effect, tax grant. That has been done for the current year. Therefore, the amount of payment through the year has already been provided for in a segregated account. As well as, as we look at revenue source it appears to be reasonably stable on a go-forward basis and therefore, should be able to meet our debt service requirements. So we had long and arduous discussion on what should be the rating on this -- on the Chicago debt? That's not to say that there aren't required improvements that have to be made to the entire Chicago and Illinois balance of payment and, specifically, the unfunded pension liability. That's got to get worked out within their own jurisdiction and within their own laws and Congressional action, which we continue to monitor. But as we look at the credit, as far as we can see for the current year as well as looking at their priority of the revenue source, where at this point I'm still comfortable that its investment grade.

I wanted to ask about pricing as well. I think you mentioned that the pricing had improved toward the end of the year and looks like from the release that it definitely did improve on the muni finance side in the U.S. How has -- what drove that increase or improvement in pricing? Have you seen any of the new pricing mechanisms that competitors have introduced have an impact on-demand for that type of pricing? Or has kind of the traditional way of pricing the business still been largely the way that customers are comfortable with?

If you really look at -- we spend a lot of time on pricing, as you can well appreciate it. Because our view is that there is kind of a minimum rate of return that we want to put our capital to use. We've got other things to do with the capital. And as we said on the call, pricing did improve in the latter half the year. And I think it was more based on A, there's a lot more demand and appreciation for the product because of all the other stuff that's going on in the marketplace and the fact that Assured Guaranty continues to meet all obligations to resolve creditors fairly and has maintained its financial strength and its high financial strength ratings that allows us to operate in the marketplace as we do. So the combination of where we saw increasing demand plus our own further analysis of use of capital, cost of capital and minimum returns, we were on that. There was a concerted effort on us to take a hard look at pricing as well as the market participating by looking for more insurance product. And the best example is those the deals we did over $100 million that we seem to be getting institutional investor back in the game, which is further once again increasing the demand for the insurance. If you really look at premium rate, and we do a lot of work, as you can well imagine on this. The premium rates in the current year were as good, if not better, than the rates that were pre-financial crisis. Most of the time, even through the latter years of the financial crisis, the premium rates today are still better than that. Although spreads are tight and rates are very-very low, the amount of premium we are getting paid for the dollar value of risk, has held up very-very well. Beyond holding up has actually improved and still represents increases over what we call the pre-crisis or the heyday in the market. We've always said, in those periods of time you have a lot more competitors out there. You have a lot more aggressive pricing in the market. And today, obviously, it is more fundamentally based on cost of capitals, what's the available spread of market, what's the share to which the insurer receives as part of the overall bargain to get the insurer access to the marketplace or get the ultimate savings. Although, smaller today than it would've been in the past for the issuer in terms of debt service.

And I'm going to ask one more on the non- GAAP loss expense on the portion that came through the other structured finance line item, was that all related to the middle market CLO, or was there something else in there?

Yes, that was related to [indiscernible], yes.

Our next question comes from Jordan Hymowitz with Philadelphia Financial. Please go ahead.

Two questions, please. One, is there any way you can quantify the effect if Puerto Rico does -- is allowed and executes Chapter 9 what the cost of municipal financing in other places would be? In other words, is there some match you can say California GOs were this, but now it could be this, or city of San Francisco? Because once the raw rule of law is broken, the effect is much broader. And if they're just thinking about Puerto Rico they can say, we can do it here. But once the country realizes the broader base effects, they may have second thought.

It's funny you should say that. Obviously, we believe there will be contagion, right. If you look at an examples like Detroit and what it's done for the rest of the municipalities in Michigan as well as how Detroit now has to access to the market under secured lien and go with the impermoder of the state on top of it. The one comment we continue to make is there has been demonstrations of this every time, there has been a disruption in the market. And yet those disruptions have been rather minor. If you think of disruption on the size in Puerto Rico in terms of A, how large it is in the marketplace. B, the consequence of the actions of going back saying, I don't care what the Constitution says of Puerto Rico. I don't care you that guys either insured our purchased these securities when they were contractually protected as well. We're just going to ignore all of that, and yet the Treasury thinks there is no consequences to that behaviour, talk about naive. I think the market is smart enough to appreciate what this would ultimately mean. We continue to make that case, and yet Treasury doesn't believe that one iota. The proof will ultimately be in the pudding. But at the end of the day as I said this will be so hotly contested legally that this will be out there for quite a long period of time. But I think there will be significant damage in the market, because what you break rule of law, which is why people invest in the U.S., why we do business in only countries that have rule of law. We are not a company that does business in Eastern Europe and other locations around the world, and there's a reason for that. To ignore that here just absolutely shocks me. That we have a U.S. Treasury that just thinks that's not an issue whatsoever that this is strictly a Puerto Rico problem, and it will be contained strictly within Puerto Rico. Well, there is no such thing, the size of their activity in the marketplace. And remember, the U.S. government gave the incentive to buy these bonds by making them triple tax exempt. This makes me kind of question who knows what, where and how much they care about the marketplace, in general.

My second question, so hypothetically, let's say Puerto Rico does have some sort of restructuring. Someone has to buy the new bonds. And everybody, including myself, who bought the original bonds, thinking we would get paid back, we're not going to buy the new bonds. Have they thought at all about who would buy the new bonds out there? Because there is at no price, once they've not kept their word, and anyone in my mind would buy any newly issued bonds?

Once again, you're hitting the old hit the nail on the head. Remember, the first reissue of the bonds is a shotgun wedding. We have to take those things back. But after that, we will get whatever we get in any exchange, if there was such a thing. I agree with you 100%, who in their right mind would ever, ever, ever trust any structure around any sort of security that would be issued on behalf of the Puerto Rico government who have done nothing but go out of their way to ignore every protection, their own Constitution, revenue arrangement, the illegal call back of the taxes. You are exactly right. I think and we hope that the market understands this and reacts and gets to Washington to make sure they understand this is a one-and-done deal. If you really do this, understand what you've done to Puerto Rico -- I think you have done more harm than you can ever imagine would be gained by restating the debt.

Thanks, guys. Maybe the Clinton Foundation could invest in some of these.

The next question comes from Brian Meredith with UBS. Please go ahead.

Just a couple of quick ones here for you, Rob, if you could just clarify the exact amount of the investment income that was one-time or this quarter?

It was approximately $35 million.

$35 million expected a little increase good. The second thing looking at the $250 million reauthorization that you had, and if I just look at what your hold co liquidity looks like in dividend and capacity. It looks like you should fairly easily be able to do that all in 2016. Is that a fair assumption?

We will manage it based on our needs, as expenses and capital within the year. So we expect to do that. But we do have the finances to do that. If you look at, we have the financial capability to do that looking at the dividend capacity. That's scheduled on Page 9 of the presentation.

It looks like you've got the ability to do more than that, is what I'm trying to get at.

Remember you have to take out holding company expenses as well, Brian.

And then the last question just curious, the HELOC development that you had in the quarter, how much longer can we expect to see this kind of stuff pop-up? I would think most of the HELOCs are going to run off within the next, I guess, 18 months. Is that true?

No, nothing close, remember, the reason we are looking at the HELOCs today is they are now hitting that nice point in their lives where they are running out of the interest only payment and now have to start amortizing the principal. We're looking at that by biddage. So if you think of it that we're in 2016, so the 2006 years are now converting. We've got the 2007 years. A 10 year IO before you start going to amortization. And although we had a good assumption that says you've been paying us for 10 years and these are not large balances, even when they start going to a amortization, we would anticipate you've been with us for 10. And your market value of your home has improved reasonably over the last few years, you're going to continue to pay. We have seen a spike in early term delinquencies, which we have to respond to. As Rob says, our launch reserve, taking into consider the facts and circumstances at the time, that there is not a lot of bounce out there, Brian. It's not expected to be an overwhelming concern. And we have strategies in place as to how we think we can start to improve on these results by offering certain modifications to certain borrowers as they convert from IO to amortization. Those strategies our just being implemented. So we are optimistic that this is not something that will be too much of a concern, but there is going to be noise as we go through this kind of first adjustment period going from IOs to amortization on these old HELOC deals, of which as I said we don't have significant balances outstanding. So it's more noise than anything else. But at least we are responsive to what we see in terms of loan performance.

In addition, Brian, we just don't estimate based on the early stage delinquencies for the deals that are just going into an IO period. We extrapolate that on other transactions that will be going through an IO period. So we are capturing all of the transactions all of those deals.

Do you have what the par is on those on your remaining balance on those HELOCs IOs?

I'm sure we can pull it up here.

1.3 I think it's in the $1.3 billion range?

Okay. Great.

$1.2 billion, $1.3 billion.

Our next question is a follow up from Sean Dargan with Macquarie. Please go ahead.

Thanks. I have one quick follow up on the structured side. There have been renewed concerns about CMBS, which has been a weak asset class this year. It looks in the supplement that all of your exposure to CMBS is investment grade. Is that correct?

Yes.

Okay. Thank you.

Our history with CMBS has been very, very positive. The deals we wrote performed very, very well through the crisis. And they continue to amortize as well.

This concludes our question-and-answer session. I would like to turn the conference back over to Robert Tucker for any closing remarks.

Thank you, operator. I'd like to thank everyone for joining us on today's call. If you have additional questions, please feel free to give us a call. Thank you, very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.